Friday 1 March 2024

Democratisation of global payments and settlement system

The exclusion of Russia from the global financial system shows why alternatives to SWIFT such as Afreximbank’s proposed PAPSS could be necessary in the future to ensure Africa’s self-reliance to move and receive funds abroad.

By David Dludla

In January 2022, Afreximbank launched the Pan-African Payment and Settlement System (PAPSS), a centralised payment and settlement infrastructure that aims to clear and settle cross-border commercial transactions in Africa. With PAPSS, a buyer in Ethiopia can pay goods supplied in Ethiopian Birr and a Djiboutian seller can receive Djiboutian Francs, while the two respective central banks settle the net position of the trades.

Most financial institutions across the world rely on the Society for Worldwide Interbank Financial Telecommunication or SWIFT to transact internationally. Informally known as the Gmail of global banking, SWIFT is messaging system used to communicate money transfers between two banks in over 200 countries and territories. Whilst SWIFT guarantees consistency and security in global financial transaction it creates inefficiencies that are costly and can even undermine trade. Africa loses at least $5 billion a year in payment transaction costs. According to the African Export-Import Bank (Afreximbank), over 80% of African cross-border payment transactions are cleared and settled offshore. 

SWIFT is also a strategic tool that major banks in developed countries can use to effect foreign policies of their respective government. Russia’s removal from the global payment system SWIFT over its conflict with US led NATO-coalition and its military operation against Ukraine in late February has laid bare the realities of how countries are vulnerable to exclusion from the international financial system. Despite exclusion from SWIFT, Russia stated that it was able to pay coupons worth ₽11.233 billion ($107.5 million) for two of its Dollar denominated sovereign Eurobonds. According to media reports Russia was able to honour its obligation using assets that were already frozen under the US sanction package. However, at the time of going to press there was another $2 billion payment due in April 2022 that might be difficult for Russia to honour.   

Given the vulnerability of developing countries to SWIFT, alternatives such as the proposed PASS and others are now becoming attractive propositions. The Africa Continental Free Trade Area (AfCFTA) Secretariat described the proposed PAPSS as a major leap in releasing the continent from overdependence on external players to accelerate intra-continental trade and investment. Commenting on the proposed PAPSS Wamkele Mene, AfCFTA Secretariat secretary-general said “We all know the challenges that we face with the cost of currency convertibility on the African continent. It costs Africa about $5 billion a year to convert currency to be able to trade”.

“So, the AfCFTA Secretariat and Afreximbank have designed and created this payment system to ensure that trade in Africa is affordable, cost-effective, accessible, and to ensure that SMEs enjoy the benefits of the Africa Continental Free Trade Area agreement” he further said

However, AfCFTA Mene emphasized that the payment system is not designed to compete with or replace existing payment systems but to facilitate the connectivity level that brings all payments systems together into one network. While there is a general support for the new African payment platform within the AfCFTA secretariat, uptake by major banks and other financial institutions in the continent has been low. Six central banks in the West African Monetary Zone (WAMZ) successfully piloted PAPSS late last year, followed by 12 commercial banks and four payment switches have signed up to the system. Last month, MFS Africa joined the PAPSS giving the platform access to over 320 million mobile users and last mile users across the 35 African markets

Steve Biko Wafula, lead researcher for money and policies at Nairobi-based Soko Directory Investments Ltd, says PAPSS was meant to make Africa more competitive on the global stage for faster payments settlements. Unfortunately, regional blocks are not discussing its implementation says Biko. “It is disappointing to note that it’s only the West Africa region that is talking and pushing for the adoption of this ecosystem. East Africa region and the Southern African region, who should have run with it, are not even discussing it.” 

“Mistrust among business peers, corruption and poor investment in cyber security are [also] the leading causes as to why PAPSS has not been taken seriously as it should” he further commented. The jury is still out there whether these issues can be resolved. Perhaps, the exclusion of Russia from the global financial system could nudge decision makers in Africa to adopt PAPSS.


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